The Tangled Web of Granny Flat Arrangements

By Richard McCullagh – Legal Director @Patrick McHugh & Co Solicitors – Adjunct lecturer in Elder Law at the College of Law Sydney – Law Society Journal # November 2015
  • Informal granny flat arrangements were once common in an earlier, less sophisticated era.
  • Today, a parent and child co-habiting with the intermixing of financial and proprietary interests is fraught with difficulties.
  • Careful instructions need to be taken to protect the parent’s security of tenure, retrieval of investment, pension entitlements and integrity of testamentary intentions.

Succession issues, equitable trusts, security of tenure, reduced pension entitlements and liability for capital gains tax – these are some of the threads of the web that can unexpectedly ensnare family members in a granny flat arrangement.

The recent decisions in Daunt v Daunt [2015] VSCA 58 and Hayes v Hayes [2015] QSC 88 are but recent examples of modern granny flat cases in Australia going back at least to Malsbury v Malsbury [1982] 1 NSWLR 226.

In this article the elderly financier or transferor will be referred to as the ‘parent’ and the homeowner as the ‘child.’

Family situation

The parent is likely to be asset-rich and income-poor seeking stability of location, company and care. In most cases, they will be a full or part

pensioner. In contrast, the child will be comparatively flush with income, paying off debt secured over their home and keen to be able to pursue new career, educational and occasionally domestic opportunities.

It is the intergenerational pooling of assets in the context of divergent needs and wants of co-habiting family members of disparate ages that make the best intentioned of ‘granny flat’ arrangements so fragile. Today they might be more aptly named ‘intergenerational family accommodation agreements’ (IFAAs).

Financial factors

The genesis of the problem is when there is a mismatch between (a) the parent’s financial contribution to buying or renovating the house; and (b) his or her registered interest in the property; that is, not being in proportion to that contribution. The same result follows where the parent has transferred the title of their house to the child for less than current market value.

Tenants in common proportionate to contributions

The best way to set up an IFAA is as tenants in common in proportion to the financial contributions made by the parent and child respectively. If push comes to shove, application can be made to the Supreme Court for the appointment of trustees for the sale of

the property. This enables the parent to retrieve his or her contribution. Having said that, traditional lenders are reluctant to advance funds with an income-poor elderly parent on the title.

Setting up this arrangement will involve some legal costs and ad valorem duty on the respective shares but the security of tenure for the parent is as good as it gets. The child may be able to borrow against the property later to finance the return of the financial contribution to the parent, rather than trustees for sale being appointed.

Owner occupation attracts the usual principal residence exemptions for pension and capital gains tax purposes. The parent’s share can devolve under their will or on intestacy. Here, the IFAA has little work to do but is still useful to record the intent of the parties, the details of sharing domestic costs, the expected provision of care and terminating events (eg the parent having to move into permanent residential aged care).

Joint tenancy

Joint tenancy has the same features as tenancy in common above but with one important difference. On the death of the first tenant – likely to be the parent – the whole property passes by survivorship to the surviving tenant and not through his or her will or under the rules of intestacy. This is likely to dismay any siblings.

In Daunt v Daunt the parents owned their home as joint tenants. The mother transferred her share to one son for

nil consideration, apparently based on advice from Centrelink to avoid a reduction in pension. When the father died the whole title passed to the son.

His brother commenced unsuccessful proceedings alleging undue influence and unconscionable conduct. From a succession perspective, joint tenancy is best avoided except in the case of an only child.

Lease and loan

A long-term lease and loan arrangement is very common in retirement villages and can work well in a private home, provided care is taken if the parent is a pensioner. A registered lease for the life of the parent gives excellent security

of tenure and a loan can provide for the enforceable repayment of his or her financial contribution. There is no stamp duty, greatly reducing the cost of implementation.

The loan provisions should provide that the loan be secured by a mortgage or, if there is already a mortgagee on title, protected by a caveat. It should be expressed to bind the child’s estate and tenure for the benefit of the parent’s estate on death. The lease can similarly be protected by a caveat in the absence of registration.

A clause should preclude the child from offering the house as security for (further) borrowing without the parent’s prior written consent. For extra protection here the parent should appoint an enduring power of attorney other than the child.

However, if the parent is a pensioner, Centrelink will characterise the amount of the loan as a financial asset that attracts deemed income. The same treatment will apply to the parent’s transfer of the whole title to his or her house to the child for less than full market value, even if the balance is payable by installments.The only exception is in the case of nil consideration (see below).

Equitable trusts

In the absence of arrangements such as those outlined above, how can the mess be dealt with when the basis of co-habitation changes dramatically? This typically arises when the child, or parent, de-partners or re-partners.

If the parent is not a registered proprietor in proportion to his or her financial contribution, equity will deem the child to be holding the corresponding share on trust for the parent unless it can be shown that a gift was clearly intended.

The presumption of advancement – that the parent would be gifting to the child – can be avoided by the IFAA stating that the child’s ownership is subject to an express trust in favour of the parent. However, Centrelink will most likely ignore this and regard it as a gift.

Absent an express trust, a court may still find a common intention by conduct that the parent’s financial contribution beyond that reflected in the title to the property was not a gift. A resulting trust will apply to the difference.

In even more amorphous circumstances, a court may impose a constructive trust on the basis that it would be unconscionable for the child to, for example, sell the property, evict the parent and not account for the parent’s financial contribution to the original acquisition. The same may apply if, without attributable blame, the parent wants or needs to move out after a relatively short period of time.

In Hayes v Hayes parents paid for the construction of a dwelling on land owned and occupied by their daughter. In the absence of a written IFAA but based on the conduct of the parties over 28 years, the court found that the parents had made a gift of the dwelling in return for care and rent-free accommodation. The son’s costly claim asserting a constructive trust for the benefit of the estate, of which he was a beneficiary, failed.

Another avenue is proprietary estoppel. Equity will hold the child to account if the parent can show that the childrepresented that a right of residence for life was being offered, that this was relied upon in making the financial contribution or transferring title and that detriment has resulted in the form of the double loss of accommodation and money from eviction or sale of the house.

In Pobjoy v Reynolds [2013] NSWSC 88, a 79 year old pensioner was induced by her daughter to sell her current home and buy a property for $121,000 in the name of her daughter and son-in-law. Divorce occurred and the property was sold under Family Court orders.

The mother obtained a declaration based on proprietary estoppel that the daughter’s subsequent property was subject to an equitable charge in her favour for the funds advanced and protected by a caveat. The charge can then be enforced by application to the court for the appointment of a trustee for sale.

‘Granny flat interest’ – when is a gift not a ‘gift’

Contrary to the equitable principles above, pensioners transferring the whole title of their house to their child for no payment but a right of residence for life will constitute a ‘granny flat interest’ without any deemed gifting.

The same applies if the parent buys a home in the child’s name or pays the costs of renovations for the flat. If the parent transfers any more, the ‘more’ will be a gift.

To this the ‘reasonableness test’ is applied to determine the extent of reduction of pension, if any. This regime applies for a five year period from  the gifting, including if the granny flat interest is terminated within that time for reasons that were ‘foreseeable’.


Parent and child should be referred to a tax accountant and ATO TR 2006/14 at paragraph 196. This indicates that the child could be exposed to a CGT liability in respect of any payment received for granting a right to reside for life.


A parent staying at home, with a reverse mortgage if necessary, or moving to a retirement village under a registered leasehold title may well involve far less legal, financial and family strife than can arise under an intergenerational financial accommodation agreement.

Lawyers retained to draft an IFAA need to exercise great care in addressing the issues of the security and timely retrieval of the parent’s financial contribution, security of tenure and, if applicable, the effect of these arrangements on pension entitlements, CGT and the realisation of testamentary intentions. Parent and child should definitely be independently advised.

It is the intergenerational pooling of assets in the context of divergent needs and wants of co-habiting family members of disparate ages that make the best intentioned of ‘granny flat’ arrangements so fragile.